[COMMENT: Here is one of the
best descriptions of our economic disaster that I have seen, and how we are
being manipulated to a faretheewell. The idea of "financialization"
is a new one to me, and quite descriptive of what happens to substantive
economics. It happens when the organic connection between money
and substantial wealth is broken.
E. Fox]

An
over-indebted, overcapacity economy cannot generate real expansion.
It can only generate speculative asset bubbles that will implode,
destroying the latest round of phantom collateral.I have endeavored
to lay out the global endgame in four recent entries:
Is This the Terminal Phase of Global Capitalism 1.0? (February
8, 2013)
Note to Fed: Giving the Banks Free Money Won’t Make Us Hire More
Workers(February 11, 2013)
Cheap, Abundant Credit Creates a Low-Return, Bubble-Prone World (February
12, 2013)
Europe Is Not “Fixed”: Two Charts (February 13, 2013)For those seeking
a summary, here is the global endgame in fourteen points:1.
In the initial “boost phase” of credit expansion, credit-based
capital ( i.e. debt-money) pours into expanding production and
increasing productivity: new production facilities are built, new
machine and software tools are purchased, etc. These investments
greatly boost production of goods and services and are thus
initially highly profitable.2.
As credit continues to expand, competitors can easily borrow the
capital needed to push into every profitable sector. Expanding
production leads to overcapacity, falling profit margins and
stagnant wages across the entire economy.
Resources (oil, copper, etc.) may command higher prices, raising the
input costs of production and the price the consumer pays. These
higher prices are negative in that they reduce disposable income
while creating no added value.3. As
investing in material production yields diminishing returns, capital
flows into financial speculation, i.e. financialization, which
generates profits from rapidly expanding credit and leverage that
is backed by either phantom collateral or claims against risky
counterparties or future productivity.In
other words, financialization is untethered from the real economy of
producing goods and services.4.
Initially, financialization generates enormous profits as credit and
leverage are extended first to the creditworthy borrowers and then
to marginal borrowers.5.
The rapid expansion of credit and leverage far outpace the expansion
of productive assets. Fast-expanding debt-money (i.e. borrowed
money) must chase a limited pool of productive assets/income
streams, inflating asset bubbles.6.
These asset bubbles create phantom collateral which is then
leveraged into even greater credit expansion. The housing bubble and
home-equity extraction are prime examples of theis dynamic.7.
The speculative credit-based bubble implodes, revealing the
collateral as phantom and removing the foundation of future
borrowing. Borrowers’ assets vanish but their debt remains to be
paid.8.
Since financialization extended credit to marginal borrowers
(households, enterprises, governments), much of the outstanding debt
is impaired: it cannot and will not be paid back. That leaves the
lenders and their enabling Central Banks/States three choices:A.
The debt must be paid with vastly depreciated currency to preserve
the appearance that it has been paid back.B.
The debt must be refinanced to preserve the illusion that it can and
will be paid back at some later date.C.
The debt must be renounced, written down or written off and any
remaining collateral liquidated.9.
Since wages have long been stagnant and the bubble-era debt must
still be serviced, there is little non-speculative surplus income to
drive more consumption.
10. In a desperate attempt to rekindle another cycle of
credit/collateral expansion, Central Banks lower the yield on cash
capital (savings) to near-zero and unleash wave after wave of
essentially “free money” credit into the banking sector.
11. Since wages remain stagnant and creditworthy borrowers are
scarce, banks have few places to make safe loans. The lower-risk
strategy is to use the central bank funds to speculate in “risk-on”
assets such as stocks, corporate bonds and real estate.
12. In a low-growth economy burdened with overcapacity in virtually
every sector, all this debt-money is once again chasing a limited
pool of productive assets/income streams.
13. This drives returns to near-zero while at the same time
increasing the risk that the resulting asset bubbles will once again
implode.
14. As a result, total credit owed remain high even as wages remain
stagnant, along with the rest of the real economy. Credit growth
falls, along with the velocity of money, as the central bank-issued
credit (and the gains from the latest central-bank inflated asset
bubbles) pools up in investment banks, hedge funds and corporations.The net result: an
over-indebted, overcapacity economy cannot generate real expansion.
It can only generate speculative asset bubbles that will implode,
destroying the latest round of phantom collateral.Here are three
charts that illustrate #14:
Eurozone credit since the inception of the euro. This is roughly
equivalent to TCMDO (Total Credit Market Debt Owed) in the U.S.
Eurozone credit growth:
Money velocity in the U.S.:That is the
endgame in three charts. Checkmate,
game over.Charles
Hugh Smith –
Of Two Minds